What are we looking for?
U.S. mid-capitalization stocks with robust profitability, trading at a reasonable price.
Since 2014, on a calendar basis, the S&P MidCap 400 outperformed the S&P 500 in only one year – 2016 – while in the prior 10 years it outperformed the large-cap index eight times.
Given the extended outperformance of large caps in the United States, we think it could be time for mid-caps to shine. It’s worth noting that the MidCap 400 is on track to outperform the S&P 500 this year.
The screen (add this screener here)
We screened U.S. stocks focusing on the following criteria:
- Market capitalization between US$5-billion and US$15-billion;
- Economic Performance Index (EPI) higher than 1.5. The EPI represents the return on capital divided by the cost of capital and is a measure of short-term wealth creation. An EPI higher than one implies short-term value creation;
- Five-year return on capital higher than 12 per cent – companies with healthy return on capital tend to be wealth creators;
- Market value-added as a percentage of market cap less than 40 per cent. This metric shows the discounted wealth creation priced in the company valuation. We derive the market value-added by subtracting the invested capital from the market cap, then dividing the result by the market cap. A positive value implies the market has priced in some future wealth creation; a lower positive value implies a cheaper valuation.
For informational purposes, we have also included price-to-earnings ratio, three-month sales growth, one-year price return and dividend yield. Please note that some ratios may be shown as of the end of the previous quarter.
What we found
| TICKER | NAME | PRICE | MKT VALUE ($ MIL.) | EPI | 5Y ROC (%) | MVA/MV (%) | P/E | 3M SALES GRTH. (%) | 1Y PRICE RTN. (%) | DIV. YLD. (%) |
| CMC-N | COMMERCIAL METALS COMPANY | 47.46 | 5576 | 4.0 | 14.1 | 22.2 | 4.7 | 4.4 | 30.9 | 1.4 |
| AN-N | AUTONATION, INC. | 119.7 | 6256 | 3.7 | 13.3 | 23.3 | 4.9 | 1.1 | -5.0 | n/a |
| RS-N | RELIANCE STEEL & ALUMINUM CO. | 205.95 | 12156 | 3.3 | 17.7 | 32.4 | 6.6 | 2.4 | 25.6 | 1.7 |
| CE-N | CELANESE CORPORATION | 101.23 | 10972 | 3.2 | 16.5 | 30.2 | 6.6 | 0.4 | -39.0 | 2.8 |
| PAG-N | PENSKE AUTOMOTIVE GROUP, INC. | 124.21 | 8968 | 3.1 | 12.3 | 33.0 | 6.8 | 1.6 | 22.6 | 1.7 |
| BLDR-N | BUILDERS FIRSTSOURCE, INC. | 64.2 | 9565 | 3.1 | 25.0 | 31.1 | 3.9 | 1.1 | -10.6 | n/a |
| LAD-N | LITHIA MOTORS, INC. | 227.81 | 6265 | 2.9 | 14.7 | 10.5 | 5.1 | 4.3 | -22.7 | 0.7 |
| WLK-N | WESTLAKE CORPORATION | 104.43 | 13331 | 2.7 | 13.5 | 22.1 | 5.1 | 6.0 | 6.6 | 1.4 |
| CG-Q | CARLYLE GROUP INC | 28.29 | 10280 | 2.3 | 39.5 | 38.2 | 5.8 | -7.9 | -50.8 | 4.0 |
| PHM-N | PULTEGROUP, INC. | 42.85 | 9780 | 2.2 | 12.7 | 5.3 | 4.3 | 3.1 | -18.3 | 1.4 |
| AMG-N | AFFILIATED MANAGERS GROUP, INC. | 153.87 | 5816 | 2.0 | 16.1 | 39.9 | 11.1 | 0.1 | -11.7 | 0.0 |
| WAL-N | WESTERN ALLIANCE BANCORP | 68.05 | 7412 | 1.8 | 17.8 | 32.3 | 7.2 | 7.5 | -41.5 | 2.1 |
| HII-N | HUNTINGTON INGALLS INDUSTRIES, INC. | 227.31 | 9070 | 1.6 | 12.9 | 36.7 | 15.8 | 2.8 | 19.3 | 2.2 |
Commercial Metals Co., which manufactures, recycles and fabricates steel and metal products, has the highest EPI on our list at four and the third-lowest P/E at 4.7. The company is showing resilience with sales up 4.4 per cent in the past quarter and has been rewarded by the market with a share-price increase of 30.9 over the past year. The company announced on Nov. 15 it would acquire a metal recycling facility from Kodiak Resources Inc. and Kodiak Properties LLC.
AutoNation Inc., an automotive retailer, has the second-highest EPI at 3.7. On Nov. 15, the company announced the acquisition of a minority ownership stake of 6.1 per cent in TrueCar Inc., an automotive digital marketplace; TrueCar’s Nasdaq-listed shares rose 32.8 per cent after the disclosure. The news sparked speculation about a possible acquisition or potential value creation through more collaboration between the two companies.
Celanese Corp., a chemical materials producer, has the fourth-highest EPI on our list at 3.2 and the second-highest dividend at 2.8 per cent. The company announced on Feb. 18 that it would acquire DuPont’s mobility and materials business for US$11-billion with cash on hand and debt. The acquisition was completed on Nov. 1. Celanese’s share price has declined 39 per cent over the past year, possibly reflecting skepticism from the market about the value creation of this major acquisition.
Investors are advised to do further research before investing in any of the companies listed in the accompanying table.
For more details about these stocks, subscribe to the Inovestor for Advisors platform for free.
Anthony Ménard, CFA, is vice-president of data management at Inovestor.
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